The FBI describes mortgage fraud as the fastest growing white-collar crime, a threat significantly exceeding the savings and loan crisis. We need to know how we can identify it, understand the consequences of this crime, protect ourselves from it, report it, and prosecute it.
Any false statement or false document presented to a lender constitutes mortgage fraud. Most of the fraud is "occupancy fraud," which is a claim on the loan application that an investment property is a primary or second home. This allows the borrower to avoid the 1 percent to 2 percent surcharge lenders charge for these riskier investor loans. The lender also may require a larger down payment for a loan for an investment property.
The result is that demand for real estate is manipulated as an otherwise unqualified buyer was created. That lie presents the illusion of increasing demand, leading to rising property values. And it deceives lenders and appraisers about value trends in the neighborhoods where the mortgage fraud takes place.
According to the Prieston Group, three out of four mortgage fraud claims result from investors involved in occupancy fraud, Once a nuisance to a handful of lenders, these economic terrorists have put innocent homeowners on the hook for overpriced houses and pushed up interest rates for all home loans.
As a result, lenders and the authorities have turned their attention to regular borrowers who are often prompted into falsifying their applications by real estate agents or loan officers who tell them it's OK because "everybody does it." But fraud is fraud. It doesn't matter who is committing it or why. Severe penalties can and increasingly do apply. Making false or misleading statements on a mortgage application or providing false documents is a federal crime and a form of personal and financial suicide.
A person who commits this crime will face hard time as mortgage fraud involves several federal felonies such as mail fraud. The crime involves state felonies as well, and the Internal Revenue Service may charge you with money laundering.
Your credit history will contain a financially devastating black mark for years. You will never be able to borrow money from regulated lenders again as you will be on their exclusionary list. Nor will you be able to hold a real estate or mortgage license again.
As soon as a lender discovers a fake statement, it can call the loan balance due, seize the property and seek charges. The IRS issued a letter that it treats any income or profit from mortgage fraud as money laundering. As the IRS audits the returns of taxpayers who quickly flipped properties, investors who relied on fraudulent mortgage applicants face the possibility of losing everything they made.
Mortgage fraud helped spawn a housing bubble. As it bursts, it will ruin households and neighborhoods. Overvalued property falsely inflates nearby home values while also raising property taxes. When the scam is uncovered or homeowners default, values can plummet quickly, leaving other owners with over-valued homes and upside down mortgages conditions that worsen the housing bust. Investigators for the FBI, state Mortgage Lending Division and local law enforcement say discoveries of mortgage fraud will continue to increase as foreclosures, sting operations and the fraudsters being turned in increasingly give evidence that borrowers lied on their loan applications.
Some of the $450 billion in home equity that homeowners cashed out during the 2001-2004 mortgage refinancing boom was based on exaggerated home values that came from mortgage fraud. Who pays for that part that goes into foreclosure? Initially it's the lender, who then spreads it back in higher interest rates.
Eventually, as this costly cancer spreads, there will be a bail-out like the savings and loan crisis, but of a higher amount much higher which is why the IRS has categorized perpetuators of mortgage fraud as economic terrorists. Honest Realtors and loan officers cannot compete against these fraudsters.
Much of the law-breaking is well known but not openly discussed, making mortgage fraud a dirty and very scary secret. It touches those who know it's occurring and those who don't even suspect it. If you're thinking about doing it, don't. If you've done it, it's just a matter of time before you're caught. If someone's asked you to participate in it, don't, file a police report, and turn them into the local FBI office. If they have a real estate license or mortgage license, turn them in to the Nevada Mortgage Division or Nevada Real Estate Division and Reno-Sparks Board of Realtors. If you know someone's who's done it, do what the FBI has asked in numerous press releases: Immediately turn these economic terrorists in.
J. Morgan Alexandra is a veteran real estate investor, a full time loan officer with Horizon Home Loans in Reno and teaches real estate classes at Truckee Meadows Community College . For more information on mortgage fraud or to contact the author, go to her Web site: www.scsr.nevada.edu/~alexa110/
